Home Prices to decline in Seattle area home market, Part 2

Q:You predicted that home prices in the Puget Sound region will fall about 10 to 20 percent over the next year. As I understand it, you are basing your prediction on previous real estate cycles, specifically the early 1990’s price drop and flat market that followed the housing boom of the late 1980’s. But this market is very different. We have never had home prices go so high, so fast. And the collapse of the subprime mortgage market means that foreclosures will hit historic levels because people won’t have enough equity in their homes to pay off their loans because they purchased with zero down loans. So it seems to me that this real estate market “correction” as you call it will be much worse than what we saw in the 1990’s. Can you please give more justification for your predictions?

A:I’ll be happy to explain why I think this real estate market is not really that unusual, but first let me clarify a few things about my predictions.

My predictions primarily relate to the urban and suburban real estate markets of King and Snohomish counties in Washington State because that’s where I have the most personal experience as a real estate broker and investor.

Another problem with talking about real estate markets is that you end up talking about averages. Averages can be misleading. As someone once said, “you can drown in a lake with an average depth of six inches.” In other words, there can be a wide range of highs and lows within an “average.” So keep that in mind. When I say that home prices will probably drop an average of 10 to 20 percent in the King and Snohomish counties over the next year or so, some neighborhoods may drop less and some may drop more – that is the nature of an “average.”

Home prices throughout this region do not move in unison. Just as the S&P 500 stock market index is the average of 500 different stocks – some moving up, some remaining unchanged and some moving down – the King and Snohomish county housing market is made up of hundreds of different neighborhoods. These different neighborhoods do not all appreciate or depreciate at exactly the same rate. Everett is not the same as Seattle and Edmonds is not the same as Bellevue. And even within certain neighborhoods, some streets are more desirable than others. There are a lot of variables involved in determining home values, with the top three being “location, location, location.”

So you can see that trying to make a broad generalization about the overall real estate market is very difficult. You can determine your own neighborhood’s housing market trend by looking at the number of homes for sale. If you live in a very popular neighborhood where “For Sale” signs are few and far between, your neighborhood is likely to suffer less of an average home price drop than a neighborhood where every other house on the block has a “For Sale” sign posted in the front yard. These neighborhood trends will become increasingly obvious next Spring when most homeowners tend to put their homes on the market and the housing inventory hits its peak.

In my previous column, I also mentioned that higher priced homes typically experience a greater overall price drop than lowered priced homes when the market cools. That is because those homes are typically “move up” homes, and if the lower priced homes aren’t selling, there is less demand for the expensive homes from move-up buyers. Less demand means lower prices for those expensive homes. And high priced homes without a unique selling feature, such as waterfront or a view, will probably suffer greater than average price declines.

Now let me address your specific question. Several people have written to me saying essentially the same thing: This market is unprecedented, we’ve never seen anything like this before.

Well I disagree.

The 1980’s was the era of the “Get Rich Quick in Real Estate” gurus. Guys like Ed Beckley, Dave Del Dotto and many others filled late night TV with infomercials and toured the country packing seminars with hundreds of people per city all promising to teach these people how to get rich by buying real estate with “no money down.” Sound familiar?

That strategy worked when home prices were rising rapidly, but when appreciation stopped, those “no money down” buyers became desperation sellers.

In the late 1980’s many Savings & Loans went bankrupt due to their loose lending policies during the go-go 1980’s housing boom. Sound familiar?

By the end of the 1980’s, foreclosures were hitting all time highs. Sound familiar?

I was actively involved in the foreclosure market at that time, and I remember looking a list of the homes for sale in the state of Texas and it was about the size of the Seattle phone book, while the list of foreclosures in the Seattle area was only a few pages long.

Historically, foreclosures in this region have always been far below the national average and I expect that trend to continue during this housing downturn. I’m not sure why that is the case, but my guess is that people live here because they like it here and they are less likely to move out of town or out of state when things get tough. For example, during the 1970 Boeing bust when almost 3 out of 4 Boeing employees lost their jobs, the Seattle are housing market could have totally collapsed.
But it didn’t because most of those laid off Boeing employees were determined to stay here and keep their homes. I remember reading stories in the paper about Boeing aerospace engineers pumping gas to pay their bills rather than moving to California to get another aerospace job. As a result, home prices declined an average of only 6 percent, and within a few years they were back up to pre Boeing bust price levels.

Our local job market is very strong, and even though the economy is likely to slow down and enter a mild recession over the next few years, I don’t see anything like the potential economic devastation of the Boeing bust on the horizon.

I see a housing market that very closely resembles the 1980’s housing boom followed by a 10-20 percent home price decline in 1990, followed by a few years of virtually no appreciation. And that’s why I am sticking to my prediction that virtually the same thing will happen this time. I expect home prices to drop by an average (there’s that term again) of 10 to 20 percent over the next year or so and then prices to remain fairly stable for the next few years after that.

In short, I believe history will repeat itself because there are so many similarities between the last housing boom/decline and this one. I don’t see this as a totally unprecedented market which will ultimately lead to a drastic home price crash as some of the “gloom and doom” predictors say. In some cases, I think their predictions are based on wishful thinking because they want home prices to come back down to 2001 price levels so they can afford to buy a house, so they keep predicting
(hoping) it will happen.

My predictions are just an educated guess and I could be wrong. But I hope this further explains my reasoning why I believe I am right.